Over the past year, the Indian Rupee (INR) has weakened against all major currencies (i.e., Rupee depreciation), shifting from overvalued to undervalued. Between late November 2024 and now, the rupee has depreciated about 7%, sliding from ₹83.4 to ₹89.2.
- This depreciation, amid a record trade deficit and global tariff shocks, boosts export competitiveness and cushions against cheap imports.
About Rupee Depreciation
- Rupee depreciation refers to a fall in the value of the Indian Rupee (INR) against major global currencies, especially the US Dollar (USD).
Key Statistics
- Broad-Based Nominal Depreciation: In the past year, the rupee has weakened against all major currencies—5.6% vs USD, 9.4% vs Euro, 14.3% vs Pound—indicating a wide-spectrum nominal depreciation.
- Shift From Overvaluation to Undervaluation: With India’s lower inflation relative to the US, UK, Eurozone, and Japan, the Real Effective Exchange Rate (REER) index has fallen from 108.1 (Nov 2024) to 97.5 (Oct 2025), marking a clear move toward undervaluation.
About the REER Index
- Published by: Reserve Bank of India (RBI)
- Refers: The REER is a weighted average of the Rupee’s exchange rate against the currencies of India’s major trading partners, adjusted for inflation differences between India and those partner countries.
- Purpose: It measures the real purchasing power of the Rupee internationally.
- Interpretation of the Index: The index is benchmarked to 100. Its deviation from 100 dictates the currency’s strategic position:
| REER Value |
Implication |
Impact on Trade |
| REER > 100 |
Overvalued Currency |
- Indian goods are more expensive globally.
- Hurts exports, increases imports.
|
| REER < 100 |
Undervalued Currency |
- Indian goods are cheaper globally.
- Boosts exports, discourages imports.
|
- Its Significance:
- Policy Signal: The RBI uses REER to guide its “managed float” policy. If REER is too high, the RBI might allow nominal depreciation to restore balance.
- Current Context: The Rupee moving from an overvalued REER (approx 108) to an undervalued REER (approx 97.5) confirms the recent depreciation is a strategic adjustment that provides a price advantage for Indian goods and services in the global market.
India’s Managed Floating Exchange Rate Regime:
- India follows a Managed Floating Exchange Rate regime (also called a market-determined exchange rate with intervention).
- The exchange rate is not fixed by the government.
- It moves based on demand and supply in the currency market.
- However, the RBI intervenes actively to “contain volatility” and ensure orderly movement of the rupee.
- RBI buys dollars when rupee strengthens too fast, and sells dollars when rupee falls sharply.
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Drivers of Rupee Depreciation
- External Sector Pressures:
- Strengthening of the United States Dollar: Higher US Federal Reserve interest rates, strong US labour-market data, and a shift towards safe-haven assets have increased global demand for the US Dollar.
- 2018 precedent — global dollar strength, rising U.S. interest rates, and trade tensions affected emerging market currencies including the rupee.
- Capital Outflows: Continuous withdrawals by Foreign Portfolio Investors (FPIs) and Foreign Institutional Investors (FIIs) from equity and debt markets have weakened demand for the Indian Rupee.
- Between November 2024 and January 2025, FPIs pulled out nearly ₹38,000 crore from Indian equity and debt markets as global investors moved toward safer U.S. assets amid high Federal Reserve interest rates.
- Global Uncertainty: Geopolitical tensions, supply-chain disruptions, and risk-averse behaviour have encouraged movement of capital towards the US Dollar.
- Domestic Macroeconomic Factors:
- High Import Dependence: India’s reliance on crude oil, electronic goods, chemicals, and gold has widened the import bill and increased dollar demand.
- Current Account Deficit (CAD): Persistent Current Account Deficit puts downward pressure on the rupee as the demand for foreign currency exceeds supply.
- CAD widening partly due to higher bullion imports as a hedge in uncertain times.
- Inflation Differential: Higher domestic retail inflation compared to US inflation reduces the real value of the Indian Rupee (the Purchasing Power Parity effect).
- Trade & Growth Dynamics:
- Weak Export Growth: A global slowdown in merchandise exports and moderation in information technology services exports has reduced foreign exchange earnings.
- Rising Commodity Prices: Higher global prices of crude oil, metals, and food grains widen the trade deficit.
- Stalled Trade Negotiations: Delays in key Free Trade Agreement (FTA) discussions have affected investor sentiment and export expectations.
- High U.S. trade tariffs are pressuring Indian exporters, forcing them to maintain competitiveness.
- Policy & Market Sentiment Factors:
- Reserve Bank of India (RBI) Intervention: The RBI intervenes to reduce volatility but cannot fully prevent depreciation during periods of global dollar strength.
- RBI has sold a net ~$50 billion between Nov 2024 and now to stabilise the rupee.
- RBI conducted a $10 billion dollar/rupee buy-sell swap auction in Feb 2025 to infuse long-term rupee liquidity.
- International Monetary Fund (IMF) Reclassification: The IMF’s reclassification of India’s exchange-rate regime to a “crawl-like arrangement” has reinforced market expectations of gradual depreciation.
- Higher Hedging Costs: Rising forward-market premiums and higher currency-hedging costs signal anticipation of further weakness in the Indian Rupee.
Why Depreciation Is Seen as Negative
The traditional view holds that a weaker rupee signals economic trouble, primarily due to India’s high reliance on imports.
- Increases Import Bill and Inflation: A weaker Rupee makes imports, especially crude oil, electronics, and gold, significantly more expensive in Rupee terms.
- This directly leads to a higher CAD and imported inflation, hitting domestic budgets.
- Rupee depreciation & shift from Russian crude to costlier U.S. oil raises imported inflation risk.
- Debt Servicing Burden: Indian companies that have borrowed in foreign currencies [(like External Commercial Borrowings (ECBs) or Foreign Currency Convertible Bonds (FCCBs)] face a higher burden, as more Rupees are required to service the same quantum of dollar debt.
- Erodes Investor Confidence: A sharp, rapid fall can scare FPIs, triggering capital outflows and a psychological impact that creates a perception of economic weakness and instability.
- Disproportionate Socio-Economic Burden: The increased cost of essential imports (like certain edible oils, fertilizers, and medical equipment) disproportionately fuels cost-of-living inflation which severely strains low-income households and increases inequality.
- Furthermore, costs for foreign services like overseas education and specialized medical treatment increase substantially, affecting the middle class.
Household-Level Impact: Students, Travellers & Middle-Class Families: A falling rupee does not hurt everyone equally; it disproportionately impacts students, tourists, and middle-income households.
- Impact on Students Studying Abroad:
- Higher Tuition Cost in INR: Even if fees remain unchanged in USD, a weaker rupee forces students to pay much more in INR for each installment.
- Rising Living Expenses: Costs of rent, groceries, transport, and utilities increase sharply due to unfavourable exchange rates.
- Budgeting Stress: Currency volatility disrupts financial planning for families, especially middle-class households that rely on long-term savings.
- Higher Borrowing Burden: Students dependent on education loans face larger outflows as EMI calculations rise with a weaker INR.
- Impact on Travellers:
- Costlier International Holidays: Foreign travel becomes significantly more expensive as hotels, food, internal flights, and local transport increase in INR terms.
- Destination Shift: Travellers increasingly prefer exchange-rate-friendly destinations (e.g., Southeast Asia) where the rupee retains higher value.
- Strain on Leisure Budget: A European trip that once cost ~₹2.2 lakh per person may now exceed ₹2.6 lakh, highlighting how depreciation alters travel affordability.
- Mitigation Strategies for Individuals:
-
- Use Forex Cards: Locking exchange rates through zero-markup forex cards protects students from unexpected INR depreciation.
- Open Local Bank Accounts Abroad: Reduces repeated conversion losses and improves budgeting control for long-term students.
- Hedging Through Forward Contracts: Parents can hedge future payments by fixing a favourable INR–USD rate in advance.
- Reduce Discretionary Spending: Students abroad can lower costs through shared housing, controlled spending, and part-time work (where legally allowed).
- Smart Travel Planning: Early booking, group travel, credit-card mileage points, and seasonal forex deals reduce the cost of foreign trips.
- These micro-level impacts coexist with macroeconomic benefits, making the depreciation story multi-dimensional and requiring balanced policy communication.
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Why a Weaker Rupee Can Actually Strengthen India (Core Benefits)
A gradual and managed depreciation acts as a structural reform that boosts the competitiveness of the Indian economy.
- Boosts Export Competitiveness: A moderately undervalued rupee makes Indian goods and services cheaper globally, improving price competitiveness across IT-ITES, textiles, pharmaceuticals, petroleum products and helping correct the $41.7-bn trade deficit.
- This can generate a J-curve effect, strengthening export volumes and rupee margins over time.
- Enhances Remittance Value: As the world’s largest remittance recipient (~$125+ bn, 2024), a weaker rupee increases the INR value of inflows, supporting domestic consumption, rural incomes, and providing a stable forex cushion.
- Strengthens Tourism & Services: Depreciation makes India a more affordable destination for foreign tourists and students, boosting inbound tourism, hospitality, medical travel, and education exports.
- Corrects Earlier Overvaluation: With the REER previously overvalued, the rupee’s fall restores the currency to a more equilibrium-aligned level, improving Balance of Payment (BoP) sustainability and long-term competitiveness.
- Attracts Cost-Effective FDI: Indian assets (real estate, manufacturing units) become cheaper in dollar terms, making India more attractive for foreign direct investment, especially in manufacturing and property markets.
- Absorbs External Trade Shocks: A weaker rupee acts as a shock absorber against the US President’s tariff offensive and a potential China Shock 2.0, reducing the threat of cheap, redirected Chinese imports flooding Indian markets.
- Preferable to Protectionism: Exchange-rate flexibility is a more efficient, market-friendly tool for correcting trade imbalances than distortionary measures such as tariffs, export bans, or quality-control restrictions.
Historical Evidence Supporting Depreciation-Led Competitiveness
History shows that currency adjustments often precede periods of export growth:
- 1991 Crisis: The sharp depreciation following the crisis was instrumental in laying the foundation for an export boom in the late 1990s.
- 2013 Taper Tantrum: The rupee fell by ~20% but subsequently led to merchandise exports growing by 15%+ between 2014 and 2016.
- 2022–23 Depreciation: Despite a weakening Rupee, India’s overall exports remained resilient, helping India become the 5th largest exporter globally (2024).
Macroeconomic Trade-offs, Policy Choices and Depreciation Risks
- The RBI’s “Impossible Trinity” Challenge: Rupee movements highlight the classic macroeconomic constraint known as the Impossible Trinity—a country cannot simultaneously maintain a fixed exchange rate, free capital flows, and an independent monetary policy.
- When the rupee comes under pressure, the RBI must choose between:
- Defending the rupee through dollar sales and liquidity tightening, or
- Preserving monetary policy independence to support growth.
- Allowing calibrated depreciation is a pragmatic choice that prioritises macroeconomic stability over rigid currency defence.
- Why Fiscal Discipline Matters: The competitive advantage of a weaker rupee holds only if the government maintains fiscal discipline.
- A high fiscal deficit fuels inflation and pushes the Real Effective Exchange Rate (REER) toward overvaluation, eroding the benefits of nominal depreciation.
- When Depreciation Becomes Harmful: Depreciation is beneficial only when orderly. It becomes harmful under:
- Uncontrolled Free-Fall: A sharp, panic-driven fall triggers capital flight and destroys market confidence.
- Weak Fundamentals: Low forex reserves, high inflation, or a rising fiscal deficit can turn depreciation into a currency crisis.
- Global Risk-Off Shocks: Aggressive Fed rate hikes, geopolitical tensions, or global financial stress cause abrupt FPI exits.
- Political Populism and Distortions: Sharp depreciation forces governments into short-term export bans and price-control measures, hurting long-term economic credibility.
- Why the RBI’s Exchange-Rate Stance Has Shifted: India’s approach has shifted toward flexibility due to:
- A More Flexible RBI Approach: Greater tolerance for market-aligned depreciation preserves reserves and credibility.
- Lower Imported-Inflation Risk: Moderating global commodity prices and easing domestic inflation reduce risks from a weaker rupee.
- Alignment With Macroeconomic Reality: A widening CAD requires a currency that reflects actual fundamentals.
- Structural Rationale Behind India’s New Stance: The long-term logic of a moderately weak rupee includes:
- Addressing CAD Pressures: A competitive rupee better reflects India’s export–import imbalance.
- Enhancing Export Competitiveness: A slightly undervalued rupee supports sustained export growth across key sectors.
- Reducing Distortionary Trade Measures: A flexible exchange rate avoids excessive reliance on tariffs, import bans, and restrictive quality-control orders.
Way Forward
- RBI’s Managed Float: Continue the policy of active intervention to curb volatility, while maintaining high Forex Reserves (currently over $700 billion).
- Export Diversification: Aggressively push schemes like the Production-Linked Incentive (PLI) and forge more Free Trade Agreements (FTAs) to raise India’s share in world exports from 1.8% to the target of 3% by 2030.
- Trade policy must be well-thought-out; bilateral FTAs with Japan, UAE, ASEAN have tilted trade balance against India.
- Reduce Import Dependence: Focus on ‘Atmanirbhar Bharat’ for energy (renewable and green hydrogen) and electronics to structurally reduce the import bill.
- India’s long-standing vulnerability stems from its heavy dependence on oil, making the acceleration of transport electrification an urgent strategic priority.
- Develop Rupee Trade: Actively promote rupee-denominated trade (e.g., with Russia, UAE) to insulate a portion of the trade balance from dollar volatility.
- Fiscal-Monetary Coordination: Strict fiscal discipline by the government is paramount. A rising fiscal deficit risks domestic overheating and inflation, which would immediately reverse the benefit of the nominal depreciation by pushing the REER back toward overvaluation.
- Boosting Digital and Financial Services Exports: A competitive rupee enhances the cost-effectiveness of India’s Information Technology (IT/ITES) sector and Global Capability Centres (GCCs).
- This strengthens the role of financial hubs like GIFT City IFSC, where dollar earnings translate to higher rupee revenues, furthering the strategy of services-led growth.
Conclusion
A gradual, managed depreciation of the rupee acts more as a shock absorber than a shock transmitter for a developing, export-aspiring economy like India. The real challenge lies not in the falling value of the rupee, but in the absence of structural reforms to fully capitalise on the competitive edge it provides. A weaker rupee is a symptom, not the disease; the real disease is uncompetitive exports.
PWOnlyIAS Extra Edge:
- Foreign Portfolio Investors (FPIs) & Foreign Institutional Investors (FIIs): Short-term foreign investors in equity and debt markets; their inflows strengthen the rupee and outflows weaken it.
- Highly sensitive to global interest rates, risk sentiment, and currency expectations.
- Current Account Deficit (CAD): Occurs when imports exceed exports in goods, services, and transfers.
- A high CAD raises foreign currency demand, creating downward pressure on the rupee.
- Purchasing Power Parity (PPP) Effect: Holds that exchange rates adjust to equalise the price of identical goods across countries. Lower domestic inflation makes a currency undervalued in real terms, boosting competitiveness.
- IMF’s “Crawl-Like Arrangement”: A regime allowing small, gradual exchange-rate adjustments to avoid shocks and correct misalignment. India does not officially follow this, but its calibrated rupee adjustments resemble such behaviour.
- Hedging Costs: The cost of insuring against currency volatility through forwards/futures.
- Higher hedging premiums raise the cost of foreign investment and borrowing, reducing foreign investor participation.
- J-Curve Effect: After depreciation, the trade balance worsens initially (costlier imports) but improves later as exports rise and imports fall — forming a J-shaped adjustment path.
- External Commercial Borrowings (ECBs): Loans raised by Indian companies from foreign lenders in foreign currencies.
- They provide access to cheaper global credit, but increase currency risk because repayment depends on the rupee’s value against the dollar.
- Foreign Currency Convertible Bonds (FCCBs): Foreign-currency–denominated bonds issued by Indian companies, which investors can later convert into equity shares.
- They offer lower interest rates but carry exchange-rate risk, as a weaker rupee makes redemption costlier.
- Balance of Payments (BoP): A comprehensive record of all economic transactions between residents of a country and the rest of the world, consisting of the Current Account, Capital Account, and Financial Account.
- It shows whether the nation is a net lender or borrower and reflects overall external sector health.
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2 Dec 2025
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